Posted on Saturday, January 15, 2011
WASHINGTON — Citigroup, the giant financial services company bailed out by the government in November 2008, is still too big to be allowed to fail, a situation that could make future bailouts of big banking companies a necessity, a report by a government watchdog said Thursday.
The report, issued by Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, said that the government still had not developed objective criteria to measure the amount of systemic risk posed by giant financial companies.
That, he said, “underscores a TARP legacy, the moral hazard associated with the continued existence of institutions that remain too big to fail.”
That conclusion is likely to resurrect a debate that raged last year during the passage of the Dodd-Frank law. Republicans said at the time that the new law did not adequately address the too-big-to-fail problem and would inevitably lead to more government bailouts. Representative Spencer Bachus, Republican of Alabama, the new chairman of the House Financial Services Committee, has said that he will make a priority of reopening debate on Dodd-Frank provisions that address supersize financial institutions and their stability.
“Taxpayers and future generations should not be burdened with having to pay for the mistakes made on Wall Street,” Mr. Bachus said in a statement Thursday.
The Treasury Department disputed part of the report’s conclusion in comments included in the report, saying that the Dodd-Frank law “provides the federal government with important tools that it did not have in the fall of 2008, which will be critical in addressing future crises.”
Those new powers include the authority to shut and break apart large financial companies, he said. The government also has authority to set more stringent capital standards and to establish an “orderly liquidation process” that gives regulators “the ability to wind down firms whose failure would have serious adverse effects on financial stability.”
Nevertheless, the report also quotes Timothy F. Geithner, the Treasury secretary, as saying that “we may have to do exceptional things again” to contain a future crisis.
The report, a 77-page assessment of the reaction to Citigroup’s need for a $20 billion cash infusion about two years ago, recounts a “strikingly ad hoc” process that led to the conclusion that Citigroup had to be saved.
After the bailout was announced, Mr. Barofsky concluded, the impact was immediate: “Citigroup’s stock price stabilized, its access to credit improved and the cost of insuring its debt declined.” The government, meanwhile, earned more than $12 billion in profit on its investment, the report said.
The report goes to the Treasury Department and Federal Reserve. No specific action is required.
By EDWARD WYATT, THE NEW YORK TIMES